The Mackinac Center has joined a coalition to oppose new taxes on digital services such as social media platforms. Why? Because the desire to punish makes bad tax policy.
Many people are skeptical of social media, and some will want to hit it with extra taxes. A bill in the Michigan Legislature would do just that.
Lawmakers look for new villains to tax. Cigarettes were targeted as bad for health and thus subject to special taxes. (This leads to high amounts of cigarette smuggling, as my colleague Michael LaFaive’s work demonstrates, but unintended consequences rarely diminish the demand to punish unpopular tobacco companies and smokers.)
Digital service taxes would charge companies such as Alphabet (Google) and Meta (Facebook, Instagram) every time they sell an advertisement. The companies are already subject to income taxes, payroll taxes and other taxes.
People have said that social media causes social fragmentation, allows for rampant cyberbullying, has ended civility in public discourse and creates other societal ills. To some lawmakers, the answer to these problems is not to protect people from these harms; it’s to punish the companies with taxes.
There’s an added political reason why lawmakers might levy the tax. Legislators want to spend more money on roads, and Democrats find unacceptable any plan that doesn’t include a tax hike of some sort. Gov. Gretchen Whitmer herself has said that these internet companies aren’t paying their fair share. Taxing the new villains might be the path of least resistance if lawmakers want to reach a deal.
Yet it remains a bad policy, and not just because it takes more out of the private economy to give to political leaders. Taxes are supposed to raise revenue on an equitable basis. No one likes paying taxes, but a tax should not be based on the unpopularity of a minority of businesses or certain groups of people. Congress has already prevented states from assessing special taxes on internet companies but not on other businesses similarly situated. Proposals in other states to impose a tax on digital services have been stuck in judicial limbo.
It was good to join with allies, including business groups, to oppose the digital service tax proposal. Let’s hope lawmakers avoid the temptation to tax the latest villain.
